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A Multibillion Dollar Industry Without a Bank 

Wednesday, Jul 13 2016
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As the California campaign for the Adult Use of Marijuana Act gains momentum and state economists forecast an industry that could grow to $15 billion annually by 2020, creating thousands of jobs and generating millions in tax revenue, there's a dark cloud hanging over potential victory celebrations on Nov. 8: The multibillion dollar industry will have no legal banking options.

If approved by voters, new cannabis businesses in California will have to overcome an obstacle that has dogged the industry in 25 medical marijuana states and four recreational-use states — Colorado, Oregon, Washington, and Alaska. There simply is no safe, efficient, and legal banking. The Attorney General's Office made that very clear with the now infamous 2011 "Cole Memo," which warned bankers not to open cannabis-related accounts or they could face money-laundering charges or possibly lose their FDIC insurance, which would be ruinous.

Oregon Sen. Jeff Merkley said the current cannabis banking laws are not only outdated, but they also inhibit reliable tax collection and create a business environment prone to crime and violence. Oregon's estimated legal cannabis market is expected to bring in a half-billion dollars during its first 14 months, and Merkley said he is worried about the negative impact that poorly thought out federal banking regulations will have on cannabis employees and the community in general. "The federal government should not be forcing Oregon's legal marijuana businesses to carry gym bags full of cash to pay their taxes, employees and bills," Merkley says. "This is an invitation to robberies, money laundering, and organized crime."

Merkley joined Washington Sen. Patty Murray to amend the financial services bill that would allow the cannabis industry reliable and legal access to banking. The Senate Appropriations Committee narrowly approved the amendment by a 16-14 vote. The amendment has yet to pass the full Senate, which will be a difficult battle.

There are some banking options for cannabis businesses, though they are all technically illegal according to federal regulations, and there is always a chance cannabis accounts will be closed and even confiscated. One option for cannabis entrepreneurs is from holding companies or open accounts using disguised or misleading names, such as Highland Organics, Mildred's Notions and Potions, or Deduca Bros. Consultants.

Such accounts are highly uncertain because the Justice Department and the U.S. Treasury have issued warnings to banks to be on the lookout for cash that smells like marijuana (American paper currency absorbs strong odors) and to be aware of what the IRS calls "structured" deposits. Dispensaries sometimes bring in large sums of cash, and anyone making a deposit of more than $10,000 is required to fill out IRS forms. To avoid attracting attention, dispensary owners will make several deposits in lesser amounts say, three deposits of $5,000. But even that attracts attention and creates an additional hardship on dispensaries as far as time, accounting, and exposure to robbery, according to Nate Bradley of the California Cannabis Industry Association.

"It's an issue," Bradley says. "The large amounts of cash cannabis businesses are forced to keep on hand makes them a target, and it's no joke. Just last month, a security guard was shot and killed in a suburban area of Denver. It's a very serious security issue and a public safety nightmare."

Bradley says that banks will also close the accounts of businesses indirectly associated with the cannabis industry. "If say a security company or an accounting firm tries to deposit a check from a business called 'Green Tree Marijuana Remedies,' they can suddenly find themselves without banking services."

California Rep. Jared Huffman, who has endorsed the Adult Use of Marijuana Act, co-sponsored a bill in Congress that would allow cannabis businesses access to banking, but the bill has yet to gain traction. Federal support for the cannabis industry will likely come incrementally as more states legalize medical and recreational cannabis. Huffman says besides banking, the federal government needs to seriously consider lifting other burdens on the burgeoning industry, such as restrictions on using the U.S. Postal Service and amending punitive IRS tax codes that don't allow cannabis businesses to write off typical business expenses.

"Right now there's deadlock because of a chicken-and-egg situation. Politically, Congress is not going to step up and enact meaningful legislation until more than half of states have legalized marijuana," Huffman says. "There is widespread public support for the industry, but if you're a senator or congressman from Georgia or Texas, there's a different sensibility."

Despite the banking hardship on the cannabis industry, there is a general sense among cannabis entrepreneurs and advocates that change is coming. They are confident, according to Bradley, that it will just take time to bridge the gulf between a federal government still clinging to outdated, overreaching drug laws from the early 1970s, and the present-day reality of predominant public support for a safe drug that is generating billions of dollars and creating thousands of jobs.

"We are very confident that banking policy is going to change," Bradley says. "And we believe the passage of the Adult Use of Marijuana Act will be the straw, a very important and large straw, that very well may break the camel's back."

John Geluardiis the author of Cannabiz: The Explosive Rise of the Medical Marijuana Industry.

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